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About Us > In the News > Small-Cap Commercial Properties See Continued Rent Drops (03/25/09)


Small-Cap Commercial Properties See Continued Rent Drops
Wednesday, March 25, 2009
Commercial Real Estate Direct Staff Report


Rents at small commercial properties have continued to fall across the board, according to Boxwood Means Inc., with declines accelerating in recent months.

Because leases at small-cap properties tend to be shorter in term than those at large-cap properties, their performance tends to react more swiftly to economic downturns than do the performance of larger-cap properties.

Boxwood Means, a Stamford, Conn., research firm that compiles property-level operating and sales data on small-cap properties through a partnership with LoopNet Inc., found that the industrial sector has so far been the hardest hit, with rents falling 78 basis points in February alone and 2.27 percent between last November and February. They now stand at $7.89/sf, down 6.29 percent from a year ago.

That decline was driven by especially soft conditions in certain regions, such as the Southeast, where industrial rents have fallen 10.2 percent from a year ago, to $7.38/sf, and fell 3.52 percent in the last quarter alone. That could be attributed in part to the relatively low barriers to entry, which made it easy to develop in that region when economic times were better, explained Randy Fuchs, principal and co-founder of Boxwood Means.

In contrast, industrial rents in the Northeast are down only 1.6 percent in the past year, while the Mid-Atlantic is down 3.37 percent.

Retail properties have fared poorly as well, falling 4.62 percent in the year through February to an average of $18.47/sf. Between December and February, rents fell 1.62 percent.

Large-cap retail community centers, meanwhile, ended last year with rents averaging $20.52/sf, unchanged from a year earlier, according to Reis Inc. That anomaly could be explained by the nature of the tenants at small-cap properties, which could be viewed as retailers of non-essential goods and services, such as non-chain affiliated restaurants and nail salons. Consumers tend to more quickly scale back purchases at such retailers in recessionary times.

Retail rents in the Midwest saw the biggest declines, falling 7.02 percent over the 12 months through February, to $13.92/sf. And in the West, they were down 6.12 percent to $21.97/sf. The Southwest saw rent declines of 2.62 percent, while the Northeast saw a decline of 1.87 percent.

Small office properties have so far weathered the economic storm relatively well, with a 1.66 percent decline over the past year to $17.24/sf. While the loss of jobs at large companies, especially financial institutions, has been well publicized, those losses were felt mostly by large-cap buildings. Small-cap buildings tend to attract local and regional businesses that might be better able to weather economic downturns. Boxwood also noted that consumption-driven recessions "generally tend to affect industrial and retail-oriented businesses before any significant fallout is felt among office users."

Indeed, office rents in the Northeast actually rose by 77 bp to $18.22/sf, while rents in the Mid-Atlantic rose by 66 bp to $16.33/sf. But in the Southeast, they fell by 5.19 percent to $15.60/sf and in the Southwest they fell by 3.33 percent to $15.99/sf

Boxwood warned that rents at small-cap properties would remain "under pressure" through the end of the year.

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